China appliance retailers struggle in online race

HeChunmei

LiHuiling

BEIJING (Caixin Online) — No one expected the running to be easy when two of China’s largest and most competitive retailers started racing a marathon on an e-commerce track.

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Each company has invested heavily in e-commerce, but both have fought for their online stores, which sell consumer electronics, household appliances and related wares.

Gome’s online unit lost about 400 million yuan ($66 million) in the first three quarters of 2013, the company said, bleeding slightly less red ink than in the same period 2012. Although Suning didn’t release profit figures of its e-commerce business, the company reported a 73% year-on-year decline in total net profit for the first three quarters. The company said with the rising online sales and the company’s effort to unify prices of its online and offline stores, Suning’s gross profit margin declined 3.48 percentage points to 15.2% for the first quarters compared to the same period last year.

Beijing-based Gome recently opted to slow the pace of change. At a press conference where he also announced third-quarter financial results, company President Wang Junzhou said traditional bricks-and-mortar stores would remain his company’s focus, while e-commerce investment would be capped.

Wang said Gome has already proven itself an experienced winner in the race for retail-store customers. To keep winning in the e-commerce era, he said, the company would adjust its retailing formula by, for example, improving its own procurement and logistics systems to directly earn money from product sales instead of leasing store space to appliance-product suppliers.

No longer will Gome follow Suning’s lead by investing heavily in online-retail projects designed to generate web traffic in hopes of future profits. That business course, Wang said, is unsustainable and rife with uncertainty.

Since the only winners in the retail sector are companies “with money in their pockets,” Wang said, the Gome division operating the gome.com.cn site will cut its losses, slow its pace and step on the gas only after a profitable, online business model has been found.

Shutterstock/Alexander Mak

The latest change goes against the grain of Suning’s aggressive push into the e-commerce arena, which continues today. Suning has been going head-to-head against no-store startups, such as Jingdong Mall, which operates the jd.com website. Suning has put great emphasis on its online operations.

Analysts have had mixed reactions to the retailers’ latest decisions. Some call Suning too daring and Gome too conservative.

Chen Yi, a researcher at Peking University’s Retail Research Center, said Suning has adapted well to the rapidly changing retail landscape. “Suning’s retail-industry experiments are rather far ahead of the curve in China and the rest of the world,” said Chen.

But Gome is no longer willing to follow Suning’s Internet-focused mindset if that requires abandoning profits in favor of volume.

Keen to follow a traditional business path, Gome has opted to protect gross profit margins while maintaining clearly visible financial health. Bricks-and-mortar stores near consumer homes would get the most emphasis, while the company’s online division would play a supporting role.

Website waffling

As part of the revamp, Gome officials announced Nov. 28 that the company would create a one-stop shopping site by consolidating its online platforms gome.com.cn and coo8.com. The company had initially climbed aboard the Internet bandwagon by buying an 80% stake in the latter website retailer in 2010 for 48 million yuan — a move spearheaded by former the chairman, Chen Xiao.

In March 2011, after Chen’s resignation following an internal power struggle, Gome’s now-imprisoned founder Huang Guangyu and his wife Du Juan regained control of the company. The next month, Gome spent 50 million yuan to establish www.gome.com.cn to push a dual-brand online sales strategy with coo8.com.

But maintaining that dual-brand strategy proved difficult. And Gome’s troubles mounted later that year when friction emerged between its online and traditional retail divisions. For example, division heads clashed over pricing.

Beset by these and other bumps in the road, Gome’s 2011 net profit fell to 1.84 billion yuan from 1.96 billion in 2010. Gome.com.cn posted a 194 million yuan loss, and coo8 .com lost 197 million yuan.

But Gome wasn’t ready to throw in the towel. It redoubled its commitment to online retailing by buying the remaining 20% of coo8.com in 2012 from coo8 founder Wang Zhiquan for 12 million yuan.

As soon as Gome picked up the e-commerce pace, appliance price wars broke out that pitted China’s major online retailers against each other. Gome joined the fray, but its officials later regretted the decision when the company posted its first loss ever for 2012. Officials blamed the 597 million yuan loss on lower sales, rising operating costs and some 500 million yuan in e-commerce investments.

That’s when Gome officials decided to change course.

One of Gome’s first money-saving moves was the website consolidation. Since then, Gome officials have taken additional steps by working to boost sales and gross profit margins while controlling expenses. On the e-commerce side, the company has sought to improve its supply, logistics and IT systems.

Gome’s website has been adjusted so that consumers can buy goods from the retailer or directly from manufacturers that use the website as a sales platform.

At the other end of the online spectrum is Suning, which decided to strip the traditional “home appliances” label from its corporate identity. In 2013, Suning stepped up efforts to build its online platform by, for example, matching online and in-store prices for all products.

The company is also diversifying by expanding into financing, insurance and other online businesses.

On the retail side, Suning offers all kinds of products through its own supply network and by offering its website as a platform for manufacturers seeking direct consumer sales. The company’s goal is to personally handle no more than 30% of all inventory, and let manufacturers handle the rest. In this way, it hopes to profit by offering logistics, financing and data-mining services.

Scaling back

Meanwhile, Suning has been closing stores. In the first 10 months of the year, it reduced the number of stores in operation by 96.

Stores that survive the Suning axe are being rewired with computer terminals so that shoppers can surf the company’s and rival retailers’ websites, compare prices and even place orders. Some 100 stores were expected to have the service at the end of 2013, rising to 350 by the end of 2014.

Suning Vice Chairman Sun Weimin said his company wants to use its store space efficiently, with product displays, Internet terminal stations and consumer centers tied to logistics and after-sales services. As a result, some stores will have to be remodeled.

Meanwhile, Gome has opted to build a vertical retail chain for electronic products available at its more than 1,000 bricks-and-mortar outlets nationwide. Its online division is testing consumer demand for other products, such as home decorations.

Currently, only about 6% of Gome’s revenues come from online sales. Chief Financial Officer Fang Wei expects 2013 to end with online sales about even with the previous year’s 4 billion yuan.

But can Gome and even Suning successfully compete against no-store, online retailers such as Jingdong? E-commerce analyst Li Chengdong wonders whether they can, given that the larger the scale, the more a retailer can benefit from the power to bargain with manufacturers.

Any new store that does not turn a profit within 18 months of opening will be shuttered.

Jingdong’s sales are likely to climb “to between 30 billion and 35 billion yuan” in 2014, up from 8 billion in 2012, Li said, “which means their bargaining power will exceed that of Gome.”

An analysis by the Beijing-based Sootoo Institute, which specializes in the Internet industry, shows that Alibaba’s Tmall online retail business accounted for 50.4% of all online business-to-consumer transactions in China during the first half of the year. Jingdong’s website handled 20.7% and traditional retailers with websites accounted for the rest, including Suning with 5.7% of all sales and Gome with 1.7%.

With such a small slice of the market, analysts wonder whether Gome has set itself up for a fall by stressing a “no loss” approach to e-commerce. Several analysts said they think it makes sense for Gome to build on its traditional storefront advantages, but that its long-term development may be weakened by under-investing in its online business.

Analysts say that, over time, an increasing proportion of the country’s retail market will shift to online sales, which means that the turf Gome is now so tenaciously defending will gradually erode.

Gome officials have repeatedly emphasized that the company’s latest e-commerce scaleback is not a wholesale abandonment of the Internet. In fact, it is exploring additional ways to use online channels to attract customers.

Gome also wants to procure and market more products through its website and stores, rather than simply function as a platform for manufacturers to hawk their wares. “The only way to maintain our advantage of low prices is to guide product prices,” Wang said.

To reach that goal, Gome executives hope to increase the proportion of products the company buys outright to 60% within three years from 20% now. It’s also started remodeling stores and, like Suning, is providing Internet access for customers so that they can compare prices. Fang said 10 stores have been revamped so far, but that next year another 90 nationwide will be wired for online shopping.

Gome executives say that the company’s storefront business, as well as online, lost money in 2012. That’s why Gome, like Suning, has been closing outlets. Fang said only about 85% of Gome’s stores are profitable.

The retailer bid goodbye to 67 unprofitable stores nationwide in 2012 and another 110 in the first 10 months of this year.

It’s also opened 65 new stores since January and, according to Wang, will continue to open stores that can be run efficiently and generate profits. Most are in the country’s medium-sized and smaller cities. Any new store that does not turn a profit within 18 months of opening will be shuttered.

Fang said plans call for opening as many as 100 new stores in medium-sized and smaller cities in 2014. About 50 stores in big cities are slated for closure.

In reporting third-quarter 2012 financial data on Nov. 18, Gome said the publicly listed part of the company posted 41.66 billion yuan in revenues and a net profit of 582 million yuan, bettering a net loss of 829 million reported for the same period 2012.

Meanwhile, Suning slowed its canter in the third quarter, posting 80.14 billion yuan in sales and a 625 million yuan net profit, down from a 2.35 billion yuan profit posted in the same period 2012.

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